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Finance (No. 2) Bill, 2009 IDX

Finance (No. 2) Bill, 2009 IDX

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IDX 2009
IDX 2009

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Published by: Balaji.S (ACA) Srirangam on Mar 15, 2010
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 Government of IndiaMinistry of FinanceDepartment of Revenue Tax Research Unit*****Gautam Bhattacharya Joint Secretary (TRU-II) Tel; 23093027Fax: 23093037e-mail: g.bhattacharya@nic.in
D.O. F. No.334/13/2009-TRU
New Delhi, 6
July, 2009Dear Chief Commissioner/ Director General/Commissioner, The Finance Minister has introduced the Finance (No. 2) Bill, 2009 in theLok Sabha on the 6
of July, 2009. Clause 112 of the Finance (No 2) Bill, 2009covers all the changes relating to Chapter V of Finance Act, 1994. Changes are alsobeing proposed in the provisions of the,-
CENVAT Credit Rules, 2004;
Works Contract (Composition Scheme for Payment of Service Tax)Rules, 2007; and
 Taxation of Services (Provided from Outside India and Received inIndia) Rules, 2006.Notification Nos. 16/2009-ST to 23/2009-ST and 16/2009-CE (NT) all dated 7
  July, 2009 refer. Details of the changes are explained in the Explanatory Notes. The salient features of the changes are discussed hereinafter.2.
New Services included in the list of Taxable Services
  The following new services are proposed to be included in the list of taxableservices. These services would get covered under the list of taxable services from adate to be notified after the enactment of Finance (No. 2) Bill, 2009.2.1 Transport of Goods through Rail: Presently, transportation of goods incontainers by rail, by other than Government railways is taxable under section65(105)(zzzp) since 2006. It is now proposed to impose service tax on goodstransported by railways including Government railways, whether in containers orotherwise. Suitable abatement and exemption to specified goods would be providedthrough issuance of notification at the appropriate time.2.2 Transport of Coastal Goods; and Goods transported through Inland water:Coastal goods (as defined under the Customs Act) and transport of goods throughNational Waterways, and inland waters are proposed to be brought under tax net.Suitable abatement and exemption to specified goods would be provided throughissuance of notification at the appropriate time.2.3 Legal Consultancy Service: As in the case of management consultancy orengineering consultancy service, any consultancy, advice or technical assistanceprovided in any discipline of law is proposed to be subjected to service tax.However, the tax would be limited to services provided by a business entity toanother business entity. It has been defined that a business entity includes firms,associates, enterprises, companies etc. but does not include an individual. Thus,services provided by an individual advocate either to an individual or even to abusiness entity would be outside the scope of the taxable service. Similarly, theservices provided by a corporate legal firm to an individual would also be outside thepurview of taxable service. Any service of appearance before any court of law or anystatutory authority would also be kept outside this levy.
2.4 Cosmetic and Plastic Surgery service:2.4.1 Beauty treatment service provided by saloons, beauty parlors andbeauticians are taxable since 2002. The service now proposed to be taxed iscosmetic surgery and plastic surgery undertaken to preserve or enhance physicalappearance or beauty. As per common definition, surgery is a medical technologyconsisting of a physical intervention on tissues. As a general rule, a procedure isconsidered surgical when it involves cutting of a patient’s tissues or closure of apreviously sustained wound. Commonly surgery is performed in a sterileenvironment with anesthesia and antiseptic conditions using surgical instruments.It also includes ‘non-invasive’ surgery.2.4.2 Some of the commonly known aesthetic/cosmetic surgeries areabdominoplasty (tummy tuck); bletharoplasty (eyelid surgery); mammoplasty;buttock augmentation and lift; rhinoplasty (reshaping of nose); otoplasty (earsurgery); Rhytidectomy (face lift); liposuction (removal of fat from the body); browlift; cheek augmentation; facial implants; lip augmentation; forehead lift; cosmeticdental surgery; orthodontics; aesthetic dentistry; laser skin surfacing etc.2.4.3 However, any reconstructive surgery undertaken to restore one’s appearance,anatomy or bodily functions affected due to congenital defects, developmentalabnormalities, degenerative diseases, injury or trauma would be outside the scope of this service. These processes could be undertaken to correct impairment caused byburns, fractures or congenital abnormalities like cleft lip etc.3.
Alteration in the scope of existing taxable services
: The following alteration/modifications have been done in the existing taxableservices. These changes would come into effect from a date to be notified after theenactment of the Finance (No. 2) Bill, 2009.3.1 Modification in Business Auxiliary Service (BAS) [section 65(19)]: It may berecalled that production or processing of goods for or on behalf of a client falls within the purview of this service. However, if any such activity amounts tomanufacture within the meaning of section 2(f) of the Central Excise Act, the same isexcluded from its purview. This exclusion has been modified to state that it wouldapply only if the activity results in manufacture of ‘excisable goods’. Both the words/phrases i.e. ‘manufacture’ and ‘excisable goods’ would have the samemeaning as defined under the Central Excise Act. The impact of this change wouldbe that even if a process of manufacture is undertaken for the client, but theresultant product does not fall under the category of excisable goods, such asalcoholic beverages, the service tax would be attracted. Certain other goods which would also fall under BAS on account of the proposed change would be kept outsidethe tax net by way of exemption notification, to be issued at the appropriate time.3.2 Stock-broker Service [section 65(105)(a)]: The present definition of a stock-broker [section 65(101)] includes sub-broker as well. A number of cases have beenbooked in the recent past where the sub-brokers have been asked to pay tax on theremuneration they receive from the stockbroker. Previously, the sub-brokers couldissue contract note and receive amounts from the investors. With effect from01.06.2005, SEBI regulations have prohibited sub-brokers from these activities. The role of sub-brokers has thus reduced substantially. Considering that the entirebroking charges are anyway taxable at the hands of stock-broker and a largenumber of small sub-brokers have to comply with the service tax laws, the sub-brokers have been excluded from the purview of service tax by making suitableamendment in the definition of stock-broker. It is also clarified that such sub-brokers should also not be charged to service tax as commission agents underBusiness Auxiliary Service. For this purposes, specific exemption notification wouldbe issued at the appropriate time.
3.3 Information Technology Software Service [section 65(105)(zzzze)]: A correctionhas been carried out in the definition of the taxable service by replacing the word‘acquiring’ by the word ‘providing’, considering the fact that it is the providing of ‘right to use’ and not the acquiring of ‘right to use’ is a taxable service. Thisamendment would have retrospective effect from 16.05.2008, when the service cameinto effect.
4. Other changes in the Finance Act, 1994:
While most of the procedures under service tax law are aligned to that of thecentral excise, one of the exceptions is the treatment to an order-in-original passedby an officer subordinate to Commissioner, if the same is not acceptable to theCommissioner on account of its lack of legality or appropriateness. While section35E of the Central Excise Act, 1944 prescribes a departmental appeal being filedagainst such order before the Commissioner (Appeals), section 84 of the FinanceAct, 1994 prescribes revision of such orders, which amounts to recalling the orderand re-adjudicating it. Field formations as well as trade has requested that theservice tax procedure should be amended to make it in line with the central exciseprocedure. The same has been done by suitably amending section 84 with certainconsequential amendments in section 86. This provision would come into effectfrom the date of enactment of the Finance (No. 2) Bill, 2009. All cases decidedbefore this date would continue to be governed by the existing provisions.4.2
 The service tax rules suffer from the deficiency of not having provisionsrelating to (1) relevant date for determination of rate of service tax and (2) place of provision of taxable services. For this purposes section 94 of the Act is beingamended to empower the Central Government to make rules in this regard. Thisprovision would come into effect from the date of enactment of the Finance (No. 2)Bill, 2009.4.3 Goods Transport Agents (GTAs) receive several services from other serviceproviders (such as warehouse keeper, cargo handlers, C&F agents) during themovement of goods, en-route. While these individual services are taxable at thehands the service providers, the GTA cannot take credit of tax paid on such services,as the abatement allowed to them is subject to condition that no credit should beavailed. This matter was agitated by the GTAs, and the government agreed toexempt such services. Consequently, notification No. 1/2009-ST dated 05.01.2009 was issued. It was, however, pointed out by GTAs that litigation is pending for thepast period. In this regard Board’s letter F. No. 137/175/2007-CX.4 (Vol. II) dated22.04.2009 was sent to the field formations to identify such cases, as theGovernment has promised to drop all past demands/litigation on this matter, latestby the end of August, 2009. In order to enable the field formations to dispose of thepending demands and discharge the notices issued for the past period, the saidnotification No. 1/2009-ST is being given retrospective effect (with effect from01.01.2005) through changes made in the Finance (N0. 2) Bill, 2009. Upon theenactment of the Bill, field formations must be directed to take up these cases onpriority and ensure that all such cases are disposed of latest by 31
August, 2009.
5. Amendments in Rules (pertaining to service taxpayers):
5.1 Changes in the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007: These rules provide a simplified procedure for working out the taxliability by the service providers providing works contract service. Instead of  working out the service element from the value of works contract and paying servicetax at full rate (i.e. 10%) the service provider is allowed to pay 4% on the ‘grossamount charged’ for the works contract. The reason for prescribing the lower rateunder the scheme is that the service provider need not bifurcate the gross value of  works contract. It was expected that the gross value should be shown to include thetotal value of materials as well as services used in providing the taxable services.However, it has been reported that in certain cases, the taxpayers are not includingthe full value of the goods required for execution of works contract for working out

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